India has finally worked out the mechanism to pay for Iranian crude oil. The three-pronged disbursement would include opening a rupee account; paying a Turkish commercial bank as well as the UAEâ€™s central bank to clear the annual expense of nearly $12 billion.

The scheme envisages opening a rupee account for 20 per cent of the annual buy, payments in lira through state-owned Turkiye Halk Bankasi in Istanbul and in Euro through the Central Bank of the UAE.

What is left is to identify the Indian bank which would forward these payments as well as run the rupee account, said a Finance Ministry official. That too, he said, should be in place when the inter-ministerial panel meets for a review on Friday.

The official said that bank agreements, oil import and payment verification documents were being translated so that the standard formats could be finalised before banks sign the pacts this month. Iran, which recently warned of stopping oil exports from next month, is being informed by the Ministry of External Affairs of the latest developments, he added.

Last month, National Iranian Oil Company told Indian refiners such as the Mangalore Refinery and Petrochemicals Ltd. and Essar Oil that a payment mechanism should be put in place failing which exports would be stopped from August. The official said the identified banks were agreeable to the US which is imposing hurdles against Iranian bank accounts under UN sanctions.

Washington accepted the fund transfer as its suggestion of an offset mechanism â€” like the South Koreans and the Japanese have with Iran â€” did not work for India because of skewed balance of payments, he added. India, Iranâ€™s second-largest crude buyer after China, is expected to buy close to $12 billion worth of crude oil this year but would export less than $2 billion worth of commodities and machines.

Already, it has chalked up a little less than $6 billion in debt for the 400,000 barrels per day supplied since December. Even though crude oil does not come under UN sanctions, banks have been reluctant to handle money transfers for fear of being ostracised by the US and the European Union in these countries.

Japan and South Korea continue to import Iranian crude but have matching exports to offset their purchase. Indiaâ€™s crisis arose after Reserve Bank of India last December dismantled the Asian Clearing Union mechanism. A temporary route was worked out in February with New Delhi making euro payments through Iranian EIH Bank based in Hamburg, Germany.

But under US pressure, Germany soon stopped accepting money for onward transfer. In May, the Cabinet Committee of Security permitted the Finance Ministry to explore various options, including opening a rupee account here, to resolve the issue.